Cohort Default Rate Jumps 25 Percent
The percentage of borrowers defaulting on their student loans within two years of entering repayment increased again this year reaching the highest level in 12 years, according to the latest default numbers issued by the U.S. Department of Education.
The fiscal year (FY) 2009 Cohort Default Rate (CDR) climbed to 8.8 percent, a 25 percent increase over the FY2008 rate of 7 percent. The CDR has been creeping up from the historic low of 4.5 percent for the 2003 cohort and is now equal to the 1997 cohort.
The FY2009 CDR -- the most recent data available -- is a snapshot of the cohort of borrowers whose first loan repayments came due between Oct. 1, 2008 and Sept. 30, 2009, and who defaulted before Sept. 30, 2010. During this time, more than 3.6 million borrowers from 5,900 schools entered repayment and more than 320,000 defaulted.
The CDR increased for every sector of higher education:
- Public institutions increased from 6 percent to 7.2 percent
- Private institutions increased from 4 percent to 4.6 percent
- For-profit institutions increased from 11.6 to 15 percent
On a call with reporters, the Department's Deputy Undersecretary James Kvaal blamed the increase on borrowers struggling with unemployment in the weak economy and the increased enrollment in for-profit schools where default rates are higher.
"These hard economic times have made it even more difficult for student borrowers to repay their loans, and that's why implementing education reforms and protecting the maximum Pell grant is more important than ever," said U.S. Secretary of Education Arne Duncan in a statement.
Department Default Prevention Efforts
The Department has taken several steps recently to limit student loan default. It strengthened the Income-Based Repayment (IBR) program to cap borrowers' monthly payment based on income and family size. The Department says it is stepping up its outreach efforts to increase awareness of the IBR option.
The Department has also implemented a host of new program integrity regulations aimed at eliminating programs that leave borrowers with large amounts of debt and poor employment prospects. The Department is also working to increase transparency about the cost of college through its College Affordability and Transparency Center. The center provides lists highlighting schools with the lowest and highest tuition and fees, their average net price and those institutions whose prices are rising at a particularly fast rate. In the coming months, the Department will disclose additional data, such as the gainful employment measures.
Research shows that many factors affect borrowers' chances of successfully repaying their student loan and avoiding default. These factors include:
- Borrower characteristics like family income and academic preparedness in high school
- In-college variables like student success, counseling and level of loan debt
- Post-college variables like employment and income
"Issues such as unemployment rates and family income can't be controlled by colleges," NASFAA President Justin Draeger said in a statement. "However, colleges and universities embrace the concept that they can have a positive impact on student loan repayment rates by helping struggling students succeed academically; helping them set realistic expectations in terms of salary and work goals; and by counseling them on smart borrowing, repayment options and avoiding default."
Draeger noted that financial aid offices are currently struggling with record workloads and a host of new and challenging regulatory requirements that can leave fewer resources for critical one-on-one counseling.
Default and Title IV Eligibility
Under current rules, all schools with default rates of 25 percent or greater for three consecutive years face loss of eligibility in the federal student aid programs. This year, five schools are affected by this provision. Kvaal notes that the number of schools that lose eligibility because of their default rate has been relatively small in the last decade. Hundreds of schools lost eligibility due to high default in the late 1980s and early 1990s when default rates were around 20 percent, according to Kvaal.
Schools can appeal the FY 2009 CDR beginning Tuesday, Sept. 20. Information on the school cohort default rate calculation and the adjustment/appeal processes is available in the Department's Cohort Default Rate Guide.
You can also contact the Department about CDRs by e-mailing firstname.lastname@example.org or by calling the Operations Performance Division Hotline at 202.377.4259.
By employing evaluation, prevention, and outreach activities, schools can work in advance to reduce the risk of student default. The Department's Office of Federal Student Aid also provides a host of resources to help schools manage their default rate. NASFAA also provides a tip sheet for struggling borrowers and a default issue brief to help financial aid professionals explain default issues to campus leaders and the media.
Gearing Up for Three Year Rates
The FY 2009 cohort is the first cohort that will be monitored for the new three-year CDR required by the Higher Education and Opportunity Act of 2008. Institutions' FY 2009 three-year CDR will be the percentage of its borrowers who were included in the 2009 CDR plus those who default on or before Sept. 30, 2011. Draft FY 2009 three-year CDRs will be provided to institutions in February 2012 with official rates released in September 2012.
The HEOA stipulates that any sanctions that would result from the new three-year CDRs are not effective until there are three sets of official three-year rates. The Department will continue to calculate and publish official two-year CDRs until three sets of three-year rates are published. The last two-year rate calculation will be for the FY 2011 cohort and will be released in 2013. Beginning in 2014, only three-year rates will be published.
Kvaal said that the new, three-year CDR will be a better indicator of default rates because some schools artificially lower the two-year CDR through forbearance and deferment. He noted that forbearance and deferment can help students avoid default, but also increase cost of loans.